On 14th October, the US Trade Representative (USTR) began the out-of-cycle review (OCR) of India’s intellectual property (IP) laws, the mandate which it gave itself in the 2014 Special 301 Report. Like several years in the past, the USTR once again included India in the Priority Watch List, but this time, India’s IP laws are being subjected to the additional scrutiny through an OCR. It is to be seen whether the OCR sets the stage for naming India as a Priority Foreign Country (PFC), viewed by the USTR as worst offender of intellectual property rights (IPRs), in the next Special 301 report.

Although the USTR has listed several areas of its concerns in India’s IP protection and enforcement regime, patents and regulatory data protection have been most extensively covered in the report. The issues listed here are the exclusions from patentability provided in Section 3(d) of the Patents Act, the use of compulsory licences and India’s refusal to introduce market exclusivity while protecting data on clinical trials before marketing approval is given to a pharmaceutical product, inadequacy of measures to prevent online piracy of films. The USTR raised serious concerns about the innovation climate in India, which, in its view, was hindering India’s progress towards an innovation-focused economy.

USTR’s inclusion of India for the OCR was a reflection of the influence that the domestic lobbies have on the country’s engagement with its partner countries. The hawkish industry lobbies, especially the PhRMA, whose support the USTR has often taken to push its global aspirations in IPRs, have been seeking the strongest possible action against India. In its 2014 Special 301 submission, the PhRMA had demanded that India should be included as a Priority Foreign Country (PFC) and has urged “USTR to take resolute action to remedy these violations, including the consideration of WTO dispute settlement, as necessary.” A PFC, according to the United States Trade Act of 1974 (as amended in 2012), is a country that that has “the most onerous or egregious acts, policies, or practices that deny adequate and effective intellectual property rights, or deny fair and equitable market access to United States persons that rely upon intellectual property protection; whose acts, policies, or practices … have the greatest adverse impact (actual or potential) on the relevant United States products, and that are not entering into good faith negotiations, or making significant progress in bilateral or multilateral negotiations, to provide adequate and effective protection of intellectual property rights.”

Under the provisions of Section 301 of the Trade Act of 1974, if the USTR determines that an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce, it take the following trade retaliatory measures. One, it can suspend, withdraw, or prevent the application of, benefits of trade agreement concessions extended to the PFC, or impose duties, fees or other import restrictions on the goods and, notwithstanding any other provision of law, services of such a country. In other words, Section 301 and the related provisions (Sections 302-310) can be used to authorise trade retaliation against countries, whose IP laws do not find the approval of the USTR.

This threat of unilateral action against India using the provisions of Section 301 of its trade act brings out two bleak facets of US trade administration’s conduct. In the first instance, the USTR has displayed the tendency to challenge the disciplines of the multilateral trading system and secondly, the trade administration has virtually downgraded the bilateral process of engagement with India, which it does through the Trade Policy Forum and which was recently revived after Indian Prime Minister Modi’s visit to the US.

The multilateral trading system has been challenged on two fronts. First, the continued use Section 301 provisions is a violation of an undertaking the trade administration has given to the Dispute Settlement Panel in 1999 not to take unilateral action before the exhaustion of Dispute Settlement Undertaking’s proceedings. This Panel heard EU’s challenge to the Sections 301-310 of the US Trade Act of 1974 (hereinafter US – Section 301 Trade Act). Secondly, the USTR has repeatedly challenged India, a country whose patent regime is entirely in conformity with the provisions of the TRIPS Agreement.

Redressing Violations of Obligations under the Covered Agreements of the WTO

Article 23 of the ‘Understanding on Rules and Procedures Governing the Settlement of Disputes’ lays down the procedures that WTO members must follow when they “seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements.”

Article 23.2(a) is more explicit about the rights and responsibilities of the members in this regard. It states that “[m]embers shall … not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding, and shall make any such determination consistent with the findings contained in the panel or Appellate Body report adopted by the DSB (Dispute Settlement Body) or an arbitration award rendered under this Understanding” (emphasis added).

This issue was in fact re-emphasised by the Panel in US – Section 301 Trade Act: “Article 23.1 is not concerned only with specific instances of violation. It prescribes a general duty of a dual nature … [I]t imposes on all Members to ‘have recourse to’ the multilateral process set out in the DSU when they seek the redress of a WTO inconsistency. In these circumstances, Members have to have recourse to the DSU dispute settlement system to the exclusion of any other system, in particular a system of unilateral enforcement of WTO rights and obligations. This, what one could call ‘exclusive dispute resolution clause,’ is an important new element of Members’ rights and obligations under the DSU.”

The Panel made several critical comments regarding the use of unilateral action. It observed that “when a Member imposes unilateral measures in violation of Article 23 in a specific dispute, serious damage is created both to other Members and the market-place.” The damage, in view of the Panel, was not confined to actual conduct in specific cases. It opined that a “law reserving the right for unilateral measures to be taken contrary to DSU rules and procedures, may – as is the case here – constitute an ongoing threat and produce a “chilling effect” causing serious damage in a variety of ways.”

The first of the damages pointed out by the Panel was the one caused directly to another Member. A Member, when faced with the threat of unilateral action, especially when it comes from an economically powerful member, may be forced to give in to the demands imposed by the Member holding out the threat, even before DSU provisions have been invoked.

The Panel remarked that “merely carrying a big stick is, in many cases, as effective a means to having one’s way as actually using the stick.” The threat alone of action “prohibited by the WTO would enable the Member concerned to exert undue leverage on other Members.” The Panel surmised that this situation “would disrupt the very stability and equilibrium which multilateral dispute resolution was meant to foster and consequently establish, namely equal protection of both large and small, powerful and less powerful Members through the consistent application of a set of rules and procedures.”

A second damage was the one caused to the marketplace itself. The imposition of WTO-prohibited unilateral measures against other Members with which it is locked in a trade dispute, may prompt “economic operators” to change their operations in a manner that could result in trade distortions. The Panel observed that “economic operators” may be wary of continuing to trade with, or invest in, the industries and/or products that are facing the threat of unilateral action. Trade may thus get distorted as “economic operators” may need to take additional insurance for the “illegal possibility” that the unilateral action contemplates.

According to the Panel, the damage caused to the marketplace could increase when a “national legislation empowers individual economic operators to trigger unilateral State action, as is the case in the US which allows individual petitioners to request the USTR to initiate an investigation under Sections 301-310.” When “economic operators” are able to “threaten their foreign competitors with the triggering of a State procedure which includes the possibility of illegal unilateral action,” it may affect their “competitive economic relationship and deny certain commercial advantages that foreign competitors would otherwise have”. The Panel remarked that the “threat of unilateral action can be as damaging on the market-place as the action itself.”

Despite its adverse observations, the Panel was persuaded not to rule the entire process of Section 301-310 investigations illegal. The reason: the “undertakings” given in the Statement of Administrative Action accompanying the Uruguay Round Agreements Act, the legislation the US Congress had adopted for implementing its WTO commitments. One of these undertakings was to “base any Section 301 determination that there has been a violation or denial of US rights … on the panel or Appellate Body findings adopted by the DSB.” The Panel ruled that this “limitation of discretion would effectively preclude a determination of inconsistency prior to exhaustion of DSU proceedings.”

Subsequent developments have, however, proved beyond doubt that the US investigations under Section 301 were an affront to the ruling of the Panel. The USTR may not have made a formal “determination of violation or denial of US rights” as provided under Section 304 of the Trade Act of 1974, but the investigations and the adverse reporting of its trading partners’ have been mirrored on the provisions of Section 304. Through these investigations, the USTR brings to bear upon its trading partners enormous pressure to amend the IP laws that they have enacted in fulfilment of their TRIPS obligations. Clearly, the intent of the US Administration is to compel the partner countries to amend their laws before approaching the DSU.

Challenging India’s TRIPS-Compliant Patent Law

The feature of India’s Patent Policy, which has been in place since the adoption of Patents Act, 1970, is its ability to strike a balance between the interests of the owners and users of patented inventions. Almost quarter of a century later, the Agreement on TRIPS underlined the imperative of a similar balanced approach that have been captured in its objectives and principles. The TRIPS Agreement, which established global standards for IPRs, states in its objective that “protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”

Further, the principles on which the Agreement has been founded emphasises that while amending their laws, WTO members must “adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development and that they need to adopt appropriate measures to “prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.” In fact, the Special 301 report itself talks about “market access barriers …that appear to impede access to health care” as a concern, (p.6) which seems to have been ignored when India’s case was taken up.

In the spirit of establishing this balance, India’s patent law includes several provisions that do not allow the patent holders to exert excessive influence over the market for patented products, to the detriment of the interests of the public at large. Thus, Section 3(d) of the Patents Act does not allow grant of patents on “mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.”

This exclusion is aimed at ensuring that rights cannot be obtained if an inventor made only minor modifications to an existing product. After all, a 20-year patent term was agreed to only because the large pharmaceutical firms argued that they needed a longer period of patent monopoly to recoup their substantial research and development (R&D) costs for producing new molecules. This logic, therefore, demands that entities making minor modifications of an existing product should not enjoy the rights as those making substantial investments in R&D.

However, as was made clear by India’s Supreme Court in the case involving Novartis’ anti-cancer drug, Gleevec (imatinib mesylate), which was denied patent rights by the court since it did not meet the test of novelty and inventive steps besides failing to meet the requirements of Section 3(d), the Indian Patents Act did not deny patents on incremental innovation. The Supreme Court in India had thus emphasised that the India was keen to promote innovators, contrary to the view being propagated by the USTR that India’s innovation climate remains grim because of its patent regime.

Public interest considerations have resulted in the adoption of the system of compulsory licensing in India. These provisions can be invoked where the patent monopolies are in conflict with public interest. Such circumstances can arise when a patent holder charges exceptionally high prices for a patented medicine or does not make a medicine available when the country faces a public health crisis, namely, a national emergency or other circumstances of extreme urgency. Under these conditions, India’s patent authorities can issue a licence to anyone other than the patent holder who is willing to produce the patented product in the country, on payment of royalty to the patent holder.

These provisions are wholly consistent with the Doha Declaration on TRIPS Agreement and Public Health. In the Doha Declaration, adopted in 2001, Ministers of WTO Member states agreed that the “TRIPS Agreement does not and should not prevent members from taking measures to protect public health.” More importantly, they agreed that the “Agreement can and should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all.” And last, but not the least, the Declaration affirmed that “[E]ach Member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted.”

It should be noted that India has exercised a high degree of prudence in the use of compulsory licensing provisions. In the post-TRIPS regime, there has been a solitary instance of the use of these provisions. This was done when the German firm, Bayer, the patent holder of an anti-cancer drug (Nexavar), charged extra-ordinarily high prices for the product and also did not make the drug available in sufficient quantity even through import. The generic drug producer, Natco, was granted a compulsory licence to ensure that patients paid Rs. 8,000 (nearly $ 130) for a month’s supply of Nexavar instead of Rs 280,000 ($ 4600) charged by Bayer. Natco is also to pay royalty of 7 % to Bayer.

But while it has targeted the inclusion of compulsory licensing system in India’s patent law, the US has issued more compulsory licences than any other country in the world. Issuance of most of these licences have been authorised by the Federal Trade Commission, which has often forced the patent-holders to licence their patents on a royalty-free basis such as in the cases of Bosch and Google, which were not aimed at meeting the critical needs of the public, unlike in India’s case.

Online Piracy

The challenge to India’s copyright regime is baffling since it is a very robust one. The Copyright and other related laws such as Information Technology Act have incorporated provisions of even the latest international agreements. They have very strong provisions for tackling online piracy including notice- and-take down procedures, in accordance with best international practices. John Doe orders issued by the Indian courts also emphasise the attention India is paying to tackle online piracy. The reports relied on by the USTR for highlighting high rate of online piracy of films in India are questionable, industry sponsored, using non- transparent methodologies and without any peer review, as brought out by recent studies.

With its abject rejection of the due processes provided by the multilateral rules, the question that arises is whether the bilateral process of engagement put in place during Prime Minister’s Modi’s recent visit to the US would become yet another platform for the US lobbies to seek changes in India’s patent regime.

India-US Bilateral Engagement on IP Issues

In September 2014, the heads of Governments of India and US endorsed the first “Vision Statement for Strategic Partnership”, which included a significant agreement on IP-related issues. The two governments “committed to establish an annual high-level Intellectual Property (IP) Working Group with appropriate decision-making and technical-level meetings as part of the Trade Policy Forum.”

The big picture against which this IP Working Group has been established raises several questions regarding its functioning. India clearly faces the challenge to prevent the Working Group from being used by the US trade administration to establish a tacit link with the Section 301 process. This will require India to assume a proactive role to define the mandate of the Working Group. India’s best interests would be served if it was able to ensure that the Working Group agrees to initiate a process through which the US trade administration is sensitised about the imperatives that underline India’s intellectual property regime. As indicated in the foregoing, India has established a balance between the need to protect innovators and safeguarding public interest, which is consistent with the framework provided by the TRIPS Agreement.

What is it all about?

This blog is a platform to update, share and comment on recent events concerning trade and health (Free Trade Agreements (FTAs), multilateral treaties (TRIPS and its flexibilities), IP laws and policies) as well as the question on how to create an alternative R&D system not based in IP that is guided by health needs and not profits.

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